For a better regulator

The Union cabinet has approved the Forward Contracts (Regulation) Amendment Bill 2010, which will now be tabled in Parliament for approval. Media reports on this have largely been positive, saying that the Bill will pave the way for greater regulatory powers for the Forward Markets Commission (FMC) as well as for new product introduction.

But it must be noted that a cabinet approval is no guarantee that a Bill will be approved in Parliament. Similar amendments to the Forward Contracts (Regulation) Act 1952 have been attempted for the past seven years. The current Bill is the fourth such attempt, and each of the previous ones had the blessings of the cabinet. Even so, FMC chairman B.C. Khatua is confident that the Bill will be passed this time, since concerns that the commodity futures market was driving food prices higher have died down.

If the Bill is passed in Parliament, it would mainly lead to the strengthening and restructuring of FMC on the lines of the Securities and Exchange Board of India (Sebi), giving it autonomy and strengthening its regulatory powers. This, in itself, seems a welcome step, since it will bring more confidence in the functioning of the commodity futures market.

But this needs to be seen in the backdrop of recommendations by committees led by Raghuram Rajan and Percy Mistry that the regulation and supervision of all financial trading should be done by Sebi, so that regulatory resources can be consolidated and optimized. Financial market and legal experts on these committees endorsed the view that unifying regulation under one body will result in economies of scale not only for the government, but also market intermediaries and participants. The Rajan committee report notes, “Sebi is ideally suited for this role, as its knowledge is rooted in the equity market, India’s most sophisticated and most liquid market." In attempting to enhance the regulatory and supervisory powers of FMC, the above logic is being rejected.

The success of the currency futures market shows that it’s possible for Sebi to carry out regulatory and supervisory functions for an asset class that’s otherwise under the jurisdiction of the Reserve Bank of India. A similar model can be adopted for the commodity futures markets, where the regulation of trading of these markets is under Sebi.

In the absence of such a model, the proposed amendments to the 1952 Act seem to be the next best option. After all, it is high time the Forward Contracts (Regulation) Act is changed to respond to the current needs of the market.

Who should regulate commodity futures: Sebi or FMC? Tell us at views@livemint.com